MI question on subtractions from income

[joanmcq]

TP has a $12,000 early IRA distribution used to pay for his daughter's tuition. There's no penalty on the federal side because it was used to pay for higher education. MI gives a deduction for amounts paid out of IRA for higher ed, so he gets a $12,000 deduction on Sch 1 line 20. Software is also giving deduction on line 12 for qualified retirement plan. He is only age 48, and from reading the instructions, it seems to be a qualified distribution he must be over age 59.5. Also, it doesn't seem right that he would get two deductions for the same amount if he was over age 59.5 for the same distribution. Am I right, or is the software right?

[Anarchrist]

Software's wrong. No subtraction for premature withdraw. Even if it was an eligible subtraction, you can't subtract the same income twice.

[joanmcq]

Be aware; TT appears to be automatically subtracting the pension for early IRA distributions at least. If you check the income is from MI, you get the subtraction. We've had three audits on this already.

[susieq]

Ira withdrawal - Michigan subtraction

I am practicing in Michigan and do not concur with you that the IRA withdrawal for educational expenses is subtractable. The IRA distribution can be subtracted after age 59 1/2, a 72 t IRC equal periodic payments arrangement, due to disability prior to 59.5 or a surviving spouse if the decedent qualified for the subtraction at the time of death. The info above is taken directly from the Michigan instruction book. Perhaps check your input since it is unlikely that the software is incorrect.

[joanmcq]

Look on page 15 of the instructions. Its a miscellaneous subtraction " the amount of a destribution from IRA accounts that qualify under section 408 if the distribution is used to pay qualified education expenses (tuition, books, fees, etc) at a postsecondary educational institution."

Its right above the holocaust victim payments.

The software was taking two subtractions, the misc. subtraction and the pension subtraction. The pension subtraction was taken automatically (trust me, I've been through the frigging interview every which way you could enter this stuff) and it takes the pension distribution every time. We're up to 4 audits now; another one came in while I was posting the last time.

[susieq]

thanks

Thank you for directing me to page 15. Guess I have not had anyone withdraw for this purpose being under 59.5. Seems strange that the MDT would not include this paragraph in the pension aubtraction area. Maybe I should not be surprised at what the state treasury does.

[joanmcq]

May have been added in after the pension rules. The misc section seems to be an ad hoc mish mash of deductions. This pension mess is going to be a problem. I wonder if Proseries has the same flaw?

[LawrenceGR]

Proseries

In Proseries there are drop down menus to classify if this is a private, public pension or taxable pension. If you check private, the program will still use age as a qualifier. I have never run into this kind of distribution before but you are correct, the State of Mich can get a little funny about some things. I also think since the state is a little stapped for money they are taking a close look at everything. I wish I could be of more help to you.

[joanmcq]

In TT it asks if a public pension, roth conversion, other IRA, qualified plan or none of the above. If you check other IRA it does not seem to use age as a qualifier; it just gives you the deduction.

[LawrenceGR]

You are Correct

I just took another look, you're right. I do think Mich is looking a lot closer at things this year. Perhaps a year or two ago that would have sailed through. If you think the subtraction is weird be glad you don't have to do a property tax credit. The income that comes into play on that can be a little problematic. Income for property tax credit includes VA benefits, SS, and child support to name a few plus the of property tax does not always equal the amount on Fed Sch A. Things are a little differant here. I do feel your pain, I have done some other states this year I hope they all go through without any trouble.

[joanmcq]

I've done property tax credit audits. One where he was MFS because wife had run off. He had no idea of her income. But it had to be included as household income up until the time she left. Fun.

[susieq]

property tax credits

Be very careful in this area on the MI 1040 CR form. If you have a client who is a resident of a facility that charges for meals and room on one bill, the facility is now specifying the amount of pro rata proerty taxes that can be used in calculating a "rental rebate".

I find this to be very frustrating since there is a specific amount that is charged for "rent" and then another charge for meals. The state is saying now that we must only use the prorated anount of taxes paid on the property and not basing the refund on the normal 20% of rent to be assumed as taxes.

[joanmcq]

Number 5

The latest audit I've gotten is for a 401(k) early distribution. TP checked 'qualfied plan'. The instructions say 401(k) distributions are deductible to the extent they are 'attributable to employer contributions or attributable to employee contributions to the extent they result in matching contributions by the employer', but then goes on to say you can't subtract amounts from a deferred comp plan that lets the employee set the amount to be put aside and does not set retirement age or requirements for years of service, including 401K plans.

So does this mean you can deduct the fraction of a 401(k) distribution that can be traced to employer contributions or employee matching contributions, but not any earnings or unmatched employee contributions, or does the second paragraph totally trump the first?